With just hours until the US election, polling remains very tight. Essentially, the race is too close to call, with major polls for either candidate within margins of error. Amid the uncertainty, political rhetoric and emotions are highly charged, and the resulting maelstrom can make rational economic analysis difficult.
However, our mandate is to look past the politics to assess the potential impact of any policy changes on the economy and markets. Given the amount of puts and takes that come into play when affecting policy changes, the actual economic influence of a single president may be far less than the campaign rhetoric would suggest. However, we have compared the potential impact of various policy proposals.
Tariff threats
Additional tariffs are likely under either administration. However, as we have discussed previously, Trump’s proposed tariffs are far more significant and could eliminate decades of gains from trade liberalization. Some experts believe Trump’s tariff threats should not be taken literally, and instead are meant to be a bargaining tactic. Still, the timing and degree of tariffs under a Trump administration remain unknown and pose a material risk to the economic outlook.
Big fiscal spending
Both candidates are proposing large stimulus packages. The temporary tax code changes from the Trump era’s Tax Cuts and Jobs Act are set to expire at the end of 2025. Realistically, most political experts do not expect these tax cuts to fully disappear. Under Harris, most new spending measures appear to be offset with higher tax revenue estimates. Tax cut extensions for most households are at least partly paid for via higher taxes on wealthy households. It is much harder to predict what the net fiscal impulse might look like under Trump. He wants to extend all current tax rates without designating any revenue offsets and has pledged additional giveaways on the campaign trail, although many are unrealistic. Higher tariffs would be a source of revenue, but it is unclear how big.
The federal deficit is likely to stay wide under either election scenario. However, if taken literally, Trump’s proposals would be expected to increase the deficit by a greater amount year over year, which may become a major area of contention for budget hawks.
Return of inflation?
A Trump administration would likely be incrementally more inflationary for several reasons:
- Higher tariffs would raise prices, at least initially.
- The amount of spending proposed by Trump is significantly higher than Harris.
- Labor market restriction via stricter immigration or mass deportations of current undocumented immigrants would be negative for consumer spending and for labor market tightness.
However, as we have stated, there are puts and takes to every campaign promise. Aggressive tariffs may be met with economically damaging retaliation, and Congress may throw a wet blanket over excessive fiscal proposals. And while Trump’s pledge for large-scale roundups and deportations appeals to his voter base, broad implementation remains unlikely. In reality, the resources, including funding, staffing, and detention space, as well as bi-partisan support to enact such a program are lacking.
Corporate profits
All else equal, a Trump administration might be beneficial for corporate profits at the margin. However, one could also argue that corporations may benefit from the stability and continuation of the status quo expected under a Harris administration.
Mergers & acquisitions
It is assumed that mergers & acquisitions would be met with a friendlier reception under Trump.
Energy entanglement
While a Harris government would be better for clean energy, the current Biden administration also has maintained traditional energy security through increased oil and natural gas production and reserves. Meanwhile, Trump’s anti-climate rhetoric may be difficult to enforce. There is an inevitable global movement toward reduced reliance on fossil fuels. Many US energy providers already are changing their production mixes to include increasingly more renewables. Furthermore, some Republicans have pledged to oppose any efforts to repeal the Inflation Reduction Act (IRA), which has benefited their respective states through increased green energy investment and jobs. Repealing the IRA would help fund Trump’s tax proposals, but absent a large Red Wave, he likely will find it difficult to remove the legislation with the exception of some green energy tax credits.
Labor markets
Illegal immigration across the border is falling, a trend that should continue under both administrations. While some might argue that the tight labor market has shifted over the last 18 to 24 months, with lower quit rates and higher unemployment, the resulting economic impact of immigration controls on businesses, prices, and households may be detrimental.
Congressional logjam
Given current numbers, it is unlikely for Democrats to retain control of the Senate. However, it is possible for Democrats to regain the House. Still, our view is that Congress will remain in a “milquetoast middle” that will constrain major legislation under virtually any election outcome. Even in the event of a Red Wave, there are enough Republicans who will be unwilling to pass significant deficit spending proposals. A risk to this outlook would be a larger-than-expected Red Wave.
Where the elected candidate may have influence is through control of federal agencies, e.g., the Federal Trade Commission, Department of Justice, Department of Homeland Security, etc. Given the likelihood of a divided Congress, impact likely will come more from the regulatory front.
Portfolio positioning
Once the market digests the post-election outcome, which hopefully comes sooner rather than later, attention will turn back to the shape of the economy and the fiscal debt situation. With respect to both equities and bonds, because we think the biggest driver of markets ultimately will be the economy, not who is the president, we are not making any near-term positioning changes based on election forecasts. With the election outcome essentially a coin flip, making changes based on polling is also essentially a toss-up, which we do not believe is prudent—or warranted.
The one caveat that might cause us to revisit our positioning is if the election results in a massive Red Wave. In that event, the odds of fiscal stimulus and spending go up dramatically. On the bond side, that potential outcome would put upward pressure on yields. On the equity side, positioning would likely shift to be less defensive. It is only that outsize Red Wave scenario that might suggest our view of the economy should change.
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CONTRIBUTORS
Patrick S. Kaser, CFA
Portfolio Manager
Brandywine Global
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